The public transport sector in Australia is ripe for reform, with governments around the country searching for better service for constituents and better value from assets. Against this backdrop, the issue of rail franchising as a mechanism to achieve the value and service government desires is naturally on the agenda again.
Given that it is almost 20 years since the first generation of rail franchising in the United Kingdom and 15 years from its introduction in Victoria, enough trains have passed over enough tracks to provide a robust body of insights into the process.
"The good news is that rail franchising efforts in the UK and Australia provide a rich repository of experience for public and private sector participants to draw on as they jointly consider the best public transport solutions for the future."
National Head, Infrastructure & Projects Group
KPMG has identified five key lessons to help inform the public transport reform agenda:
The first lesson learned is that what precedes the process is just as important as the process itself. Rail franchising in Victoria occurred in a very specific context. The Kennett-Stockdale government had a cross-industry reform agenda, and reforming public transport was part of the bigger picture. But a critical part of the equation was both political will and clear leadership based on real vision for what reform in the sector could achieve.
Franchising is different to other types of reform and public divestment. Franchising is a process of seeking the best global operator to operate a network in partnership with government – to bring a better customer experience at a lower ongoing cost to government. The State remains the purchaser of public transport services and can never fully remove itself from responsibility, including retaining ownership of the rail network assets, setting fares, setting broader transport policy and planning and delivering, sometimes in partnership with the franchisee, large capital projects. While government may want savings, the objectives of customer experience (such as on-time running, reliability and innovation), patronage growth, ability to help with development and implementation of capital projects are also critical.
The Victorian and UK experience both demonstrate how important it is to implement the right franchise and franchisee structure. Overall, the lesson learned is the fewer interfaces the better. Where possible, the number of franchises should be contained – too many operators, some of whom have operating responsibility over small parts of the network only, limit the operating efficiencies and network wide customer benefits that can be achieved. The consolidation of the UK and Melbourne franchises into a smaller number over time supports this.
The internal structure of the franchisee is equally important. The Victorian experience suggests that an equity model should be preferred, that is, where all key parties delivering the various components of the vertically franchise have equity participation in the entity contracting with the State is preferable.
Of all the lessons learned about rail franchising over the last 20 years, the shift in the general philosophy around risk transfer has been the most profound. In the 1990s contracts pushed almost all risk into the private sector – there was no real concept of risk being taken by the party best able to manage it. More recent contracts still transfer revenue risk as it provides a strong incentive to drive good behaviours rather than just rely on contract provisions. But now they include a sharing of this risk with a level of upside and downside protection.
An important relational lesson has also been learned; managing 'by the contract' is not the most effective approach. A pragmatic partnership approach is a far better paradigm. Both the UK and Victorian franchising show that appropriate governance structures are important. The UK cycled through a number of different models – moving from the Office of Passenger Rail Franchising to the Strategic Rail Authority, then to the Department for Transport. In Victoria, the establishment of Public Transport Victoria in 2011 to manage franchise contracts has been highly effective.
Having the right structure to govern contracts is critical, but so too is the practical application of a contract. The team managing the arrangement needs to be able to match it with the franchisee on a day-to-day basis.
The Australian and UK rail franchising programs provide a significant body of knowledge and experience to draw on to inform the decision to franchise, the franchise structure, the procurement process and the management of contracts. However equally it's dangerous to apply models from other jurisdictions without appropriate consideration of unique characteristics of the system and government's objectives.
What's clear is that there are major benefits and major challenges to overcome – but the journey can be worth it.